FICO - Your Credit Score
Because we live in a computer-driven society, it's probably not that surprising that your ability to repay your mortgage comes down to one number. The FICO score is compiled by credit reporting agencies. These agencies use the payment history of your various loans: credit cards, mortgages, car loans and others.
Equifax, TransUnion, and Experian, the three major credit agencies, each have their own proprietary formula for building a credit score. Fair Isaac and Cooriginally developed this score. . Experian uses this model and calls its score FICO. Equifax's model, based on FICO, is called BEACON, while TransUnion, which also uses a slightly modified FICO, calls its score EMPIRICA. While the formulas vary from one agency to another, all of the agencies use the following to determine a score:
- Your Credit History - How long have you had credit?
- History of Payments - Have you paid more than 30 days late, and how often?
- Credit Card Balances - How many accounts do you carry? How much do you owe?
- Credit Inquiries - How many times have you had your credit checked for a loan?
These factors are assigned weights based on the formula being used. Each formula produces a single number which may vary slightly from one agency to another. Credit scores range from 300 to 800. Higher is always better. Most home buyers probably find their credit scores above 620.
Not just for qualifying
Did you know? Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Can I raise my credit score?
Unfortunately, there isn't a lot you can do to immediately improve your credit score. Some companies promise quick fixes, but they can't do anything different than what you can do — for free. (Of course you must have incorrect items removed from your credit report.)
Know your FICO
In order to raise your FICO score, you've got to obtain the reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the corporation that offered the original FICO credit score, offers FICO scores on its website: myFICO.com. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. They also provide information and tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a federally-mandated free credit report every year from the three major credit reporting agencies by visiting AnnualCreditReport.com. While this report does not include a free credit score, the cost to "upgrade" your report to include a credit score is very reasonable.
Armed with this information, you'll be a more informed consumer and you'll be better positioned to get the right mortgage for you.